When making choices it is always prudent, according to the old saying, to be careful what you wish for – you might just get it. Such is the case of former Goldman Sachs director Rajat K. Gupta. In early 2011 Mr. Gupta was charged by the SEC in an administrative proceeding with insider trading. In the Matter of Rajat K. Gupta, Adm. Proc. File No. 3-14279 (March 1, 2011). The Order detailed alleged illegal tipping to his close friend and business partner, Raji Rajaratnam of the Galleon Fund who was also convicted of insider trading based largely on tape recordings from government wire taps.
At the time the proceeding was instituted, the venue selection issue that underlies Lucia was emerging. Mr. Gupta filed suit against the agency, claiming essentially that his rights under the Due Process and Equal Protection clauses of the Constitution were violated because every insider trading case stemming from the Galleon Fund investigations had been brought in district court, not as an administrative proceeding. While the SEC moved to dismiss arguing that the question had to be presented in the administrative proceeding, Judge Rakoff denied the motion – the opposite of what occurred in virtually every other similar case. Gupta v. SEC, Civil Action No. 11 Civ 1900 (S.D.N.Y. Ruling July 11, 2011).
A few months later Mr. Gupta – unlike Mr. Lucia – got his wish. The insider trading litigation was instituted in district court and the Commission’s administrative proceeding was dismissed. The SEC filed a civil action. SEC v. Gupta, Civil Action No. 11 Civ. 7566 (S.D.N.Y. Oct. 26, 2011). And, the U.S. Attorney’s Office filed a parallel criminal action. U.S. v. Gupta, No. 10 crim 907 (S.D.N.Y. Oct. 26, 2011). Mr. Gupta, of course, did not actually get what he wanted. Rather, he was convicted on multiple counts of conspiracy and securities fraud and sentenced to prison.
This week Mr. Gupta’s second appeal of his criminal convictions was rejected by the Second Circuit. Rajat K. Gupta v. U.S., Nos. 15-2707 & 15-2712 (2nd Cir. Jan. 7, 2019). His initial appeal centered on the question of whether certain wire tape evidence regarding the claimed illegal tips to Mr. Rajaratnam should have been excluded while other evidence he offered should have been admitted at trial. The Court rejected the claims. U.S. v. Gupta, 474 F.3d (2nd Cir. 2014).
The current appeal was based on one key issue regarding the jury instructions – a claim that the personal benefit element of an insider trading claim was incorrectly defined. Specifically, the Court told the jury that the government must prove that Mr. Gupta engaged in insider trading “in anticipation of receiving at least some modest benefit in return” and that the benefit “does not need to be financial . . . It could include . . . maintaining a good relationship with a frequent business partner . . .” In presenting this issue Mr. Gupta admitted that he failed to properly present the issue at trial, but argues that default should be excused because of prejudice or actual innocence.
To excuse the default Mr. Gupta must demonstrate either cause or actual prejudice, according to the Court. To sustain this burden the defendant must establish some objective factor external to the defense. This means that “the prejudge that must be shown is ‘not merely whether the instruction is undesirable, erroneous, or even universally condemned,’ but rather ‘whether the ailing instruction by itself so infected the entire trial that the resulting conviction violates due process.’ Quoting U.S. v. Frady, 456 U.S. 152, 165 (1982).
Although Mr. Gupta ties his objection to the Court’s determination in U.S. v. Newman, 773 F. 3d 438 (2nd Cir. 2014) which was decided after his trial, “he presents no viable claim that the personal benefit challenge was unavailable to his counsel on appeal.” More importantly, Mr. Gupta has failed to show prejudice – that the personal benefit instructions he challenges were “so flawed as to deny him due process.” In this regard, it is axiomatic that the instruction must be viewed not in isolation but in context. Although Mr. Guta argued that it was error to instruct the jury that a personal benefit of “maintaining a good relationship” was sufficient, in fact the instruction went on to state “with a frequent business partner.” That statement is consistent with the teachings of the Supreme Court in Dirks v. SEC, 463 U.S. 646 (1983). And, Mr. Gupta’s claim that the benefit had to be financial is contrary not just to that decision but also Salman v. U.S., 137 S.Ct. 420 (2016).
Finally, on the claim of actual innocence, Mr. Gupta failed to demonstrate in view of all the evidence that no reasonable juror would have convicted him. To the contrary, the record is replete with examples of Mr. Gupta calling Mr. Rajaratnam with inside information; of trading by Galleon in which Mr. Gupta had a stake; and of profits being made. For example, on September 23, 2008 Mr. Gupta participated in a board meeting at Goldman Sachs Group, Inc. in which he learned that Warren Buffett was about to invest $5 billion in the investment bank. The deal was to be announced at 6 p.m. At 3:45 p.m. – one minute after the meeting ended – Mr. Gupta called his friend Mr. Rajaratnam. The two men spoke briefly. Galleon immediately began buying Goldman shares before the announcement and purchases by Mr. Buffett. A record built on such evidence fails to establish actual innocence.